Bank warns borrowing costs will rise

BRITISH banks expect to significantly raise borrowing costs for businesses and home-buyers over the next three months as the cost of their funding rises, the Bank of England said yesterday.

The Bank’s latest quarterly credit conditions survey shows the challenge faced by the central bank and the coalition to lower the cost of credit to firms and households.

The survey took place between 14 May and 31 May, before governor Sir Mervyn King unveiled a scheme to provide cheap longer-term funding to banks to encourage them to lend, as well as steps to reduce banks’ funding costs, which have rocketed as a result of the Eurozone crisis.

The survey showed that over the previous three months, banks had been passing on to customers the higher costs that they faced when they raised money from capital markets.

“The elevated cost of wholesale funding for banks has continued to be passed through to spreads on secured household lending, and lending to firms,” the Bank said.

“Spreads were expected to rise markedly on lending to firms of all sizes ... in the next three months,” it added. Despite passing on higher costs to borrowers, banks expected supply and demand for most types of loan to remain broadly stable. Analysts at Investec said the survey “raises another set of reasons to worry about the UK’s recovery potential over the quarter ahead”.